TSC Ratings' Updates: Allied Capital

Each business day, TheStreet.com Ratings updates its ratings on the stocks it covers. The proprietary ratings model projects a stock's total return potential over a 12-month period, including both price appreciation and dividends. Buy, hold or sell ratings designate how the Ratings group expects these stocks to perform against a general benchmark of the equities market and interest rates.

While the ratings model is quantitative, it uses both subjective and objective elements. For instance, subjective elements include expected equities market returns, future interest rates, implied industry outlook and company earnings forecasts. Objective elements include volatility of past operating revenue, financial strength and company cash flows.

However, the rating does not incorporate all of the factors that can alter a stock's performance. For example, it doesn't always factor in recent corporate or industry events that could affect the stock price, nor does it include recent technology developments and competitive dynamics that may affect the company.

For those reasons, we believe a rating alone cannot tell the whole story, and that it should be part of an investor's overall research.

The following ratings changes were generated on August 7.

Allied Capital ( ALD), which is a private equity firm specializing in buyouts, acquisitions, recapitalizations, note purchases, growth capital and middle market equity and debt investments, was downgraded to sell. The downgrade is driven by several weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share.

The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared with that of the S&P 500 and the Capital Markets industry. The net income has significantly decreased by 214.6% when compared with the same quarter one year ago, falling to a loss of $102.20 million from a profit of $89.16 million. As a result, Allied Capital has experienced a steep decline in earnings per share in the most-recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year.

During the past fiscal year, the company reported lower earnings of 99 cents a share vs. $1.70 a share it earned the prior year. This year, the analysts' expect earnings to improve to $1.49 a share. Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior--a signal of major weakness within the corporation. Compared with other companies in the Capital Markets industry and the overall market, Allied Capital's return on equity significantly trails that of both the industry average and the S&P 500. Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 50.07%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 203.5% compared with the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper, in proportion to its earnings over the past year, than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now. Allied Capital had been rated a hold since November 11, 2007.

Steven Madden ( SHOO), which designs, sources, markets and retails fashion-forward footwear for women, men and children. It also designs, sources, markets, and retails fashion handbags and accessories, was upgraded to buy. The upgrade is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. Among the primary strengths of the company are its expanding profit margins over time. We feel these strengths outweigh the fact that the company has had somewhat weak growth in earnings per share.

We view Steve Madden's 43.3% gross profit margin as quite strong, however the company has managed to decrease its margins from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 6.80% trails the industry average. The revenue fell significantly faster than the industry average of 31.9%. In the same quarter one year prior, revenue slightly dropped by 1.2%. The decline in revenue appears to have seeped down to the company's bottom line, decreasing earnings per share. The firm's current return on equity is lower than its return on equity from the same quarter one year prior, certainly a clear sign of weakness within the company. Steven Madden's stock is off 12.43% from its price level of one year ago, reflecting a combination of the general market trend and the company's own weaknesses, including its lower earnings per share compared to the year-earlier quarter.

Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings. The firm's earnings per share declined by 12.2% in the most-recent quarter compared with the same quarter a year ago. Earnings per share have declined over the last year and we anticipate that this should continue in the coming year. During the past fiscal year, Steve Madden reported lower earnings of $1.67 a share versus $2.09 a share it earned the prior year. For the next year, Wall Street expects earnings to fall 5.4% to $1.58 a share. Steve Madden had been rated a hold since October 10, 2007.

Fairfax Financial Holdings ( FFH), which engages in property and casualty insurance and reinsurance, investment management, and insurance claims management businesses, was upgraded to hold. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its notable return on equity, reasonable valuation levels and good cash flow from operations. However, as a counter to these strengths, we find that the growth in the company's net income has been quite unimpressive. The company's current return on equity greatly increased when compared to its return on equity from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared with other companies in the Insurance industry and the overall market, Fairfax return on equity significantly exceeds that of both the industry average and the S&P 500.

Despite currently having a low debt-to-equity ratio of 0.35, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed against the S&P 500 and did not exceed that of the Insurance industry. The net income has significantly decreased by 83.6% when compared with the same quarter one year ago, falling to $27.6 million from $168.1 million. Looking at where the stock is today compared with one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period, despite the company's weak earnings results. Looking ahead, our view is that this company's fundamentals will not have much impact in either direction, allowing the stock to generally move up or down based on the push and pull of the broad market. Fairfax Financial had been rated a sell since September 18, 2007.

Harmony Gold Mining ( HMY), which conducts underground and surface gold mining in South Africa, Australia, and Papua New Guinea, was downgraded to sell. The downgrade is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity, poor profit margins, weak operating cash flow and generally disappointing historical performance in the stock itself.

The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared with that of the S&P 500 and the Metals & Mining industry. The net income has significantly decreased by 89.2% when compared with the same quarter one year ago to $7 million, falling from $65 million. The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared with other companies in the Metals & Mining industry and the overall market, Harmony Gold's return on equity significantly trails that of both the industry average and the S&P 500.

The gross profit margin for Harmony Gold is rather low--currently its gross margins is at 20.90%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 2.30% significantly trails the industry average. Net operating cash flow has significantly decreased to -$64.00 million, which is a decrease of about 200.00% when compared with the same quarter last year. In addition, in comparison to the industry average, the firm's growth rate is much lower. The share price of the company is down 16.1% when compared with where it was trading one year earlier. This reflects both the trend in the overall market as well as the sharp decline in the company's earnings per share. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy. Harmony Gold had been rated a hold since August 4, 2006.

Sinoenergy ( SNEN), which engages in the manufacture and sale of non standard pressure containers and compressed natural gas (CNG) storage and transportation products in the People's Republic of China, was initiated with a hold. We were mixed with our rating for Sinoenergy since the firm shows some strength in some areas while some weaknesses in others. The company shows little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, notable return on equity and expanding profit margins. However, as a counter to these strengths, we find that the company has not been very careful in the management of its balance sheet.

The gross profit margin for Sinoenergy is rather high--currently at 51%, which has increased from the same quarter the previous year. Along with this, the net profit margin of 36.8% significantly outperformed against the industry average. The debt-to-equity ratio of 1.07 is relatively high when compared with the industry average, suggesting a need for better debt level management. Along with the unfavorable debt-to-equity ratio, the firm maintains a poor quick ratio of 0.77, which illustrates the inability to avoid short-term cash problems. Sinoenergy has very impressive revenue growth, greatly exceeded the industry average of 29.8%. Since the same quarter one year prior, revenue leaped by 194.5%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share. Powered by its strong earnings growth of 250% and other important driving factors, this stock has surged by 56.2% over the past year, outperforming the rise in the S&P 500 Index during the same period. Although the firm has had significant growth over the past year, our hold rating indicates that we do not recommend additional investment in this stock at the current time.

Additional ratings changes from August 7 are listed below.

TITLE
Ticker Exchange Company Name Change New Rating Former Rating
ALD New York Stock Exchange ALLIED CAPITAL CORP Downgrade Sell Hold
BHS New York Stock Exchange BROOKFIELD HOMES CORP Downgrade Sell Hold
BPHX NASDAQ-NMS Stock Market BLUEPHOENIX SOLUTIONS LTD Downgrade Sell Hold
CVBF NASDAQ-NMS Stock Market CVB FINANCIAL CORP Upgrade Buy Hold
END American Stock Exchange ENDEAVOUR INTERNATIONAL CORP Downgrade Sell Hold
FELE NASDAQ-NMS Stock Market FRANKLIN ELECTRIC CO INC Upgrade Buy Hold
FFH New York Stock Exchange FAIRFAX FINANCIAL HOLDINGS Downgrade Hold Buy
FPU American Stock Exchange FLORIDA PUBLIC UTILITIES CO Upgrade Buy Hold
FST New York Stock Exchange FOREST OIL CORP Downgrade Hold Buy
GB New York Stock Exchange GREATBATCH INC Upgrade Buy Hold
GBCI NASDAQ-NMS Stock Market GLACIER BANCORP INC Upgrade Buy Hold
GLT New York Stock Exchange GLATFELTER Downgrade Hold Buy
HMY New York Stock Exchange HARMONY GOLD MINING CO LTD Downgrade Sell Hold
HT New York Stock Exchange HERSHA HOSPITALITY TRUST Upgrade Hold Sell
LOAN NASDAQ-NMS Stock Market MANHATTAN BRIDGE CAPITAL INC Upgrade Hold Sell
OSUR NASDAQ-NMS Stock Market ORASURE TECHNOLOGIES INC Downgrade Sell Hold
PPS New York Stock Exchange POST PROPERTIES INC Downgrade Sell Hold
QSFT NASDAQ-NMS Stock Market QUEST SOFTWARE INC Downgrade Hold Buy
RACK NASDAQ-NMS Stock Market RACKABLE SYSTEMS INC Downgrade Sell Hold
SHOO NASDAQ-NMS Stock Market MADDEN STEVEN LTD Upgrade Buy Hold
SMP New York Stock Exchange STANDARD MOTOR PRODS Downgrade Hold Buy
SNEN NASDAQ-NMS Stock Market SINOENERGY CORP Initiated Hold
SWX New York Stock Exchange SOUTHWEST GAS CORP Downgrade Hold Buy
SYMS NASDAQ-NMS Stock Market SYMS CORP Upgrade Hold Sell
TAL New York Stock Exchange TAL INTERNATIONAL GROUP INC Upgrade Buy Hold
TMRK NASDAQ-NMS Stock Market TERREMARK WORLDWIDE INC Upgrade Hold Sell
Source: INSERT SOURCE

This article was written by a staff member of TheStreet.com Ratings.

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